You Have Been Hired by a New Firm That Is

question 83

Multiple Choice

You have been hired by a new firm that is just being started. The CFO wants to finance with 60% debt, but the president thinks it would be better to hold the percentage of debt in the capital structure (wd) to only 10%. Other things held constant, and based on the data below, if the firm uses more debt, by how much would the ROE change, i.e., what is ROENew - ROEOld?

• A) 5.44%
• B) 5.73%
• C) 6.03%
• D) 6.33%
• E) 6.65%

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Definitions:

Frequency Distribution

A statistical representation showing how often each different value in a set of data occurs.

Compounded Monthly

A calculation method where interest is added to the principal sum at the end of each month, and future interest is calculated on the new total.

Future Value

Also known as the compound amount, the total value of an investment; equal to the principal plus all the compound interest.

Equal Amount

A quantity that is the same in size, number, or value when compared to another.